China is being considered as one of the big potential markets in the world. As a foreign investor, doing business in China is not an easy thing considering the difference of the political, language, cultural, etc. This article gives a guidance to foreign investors in terms of the six most important things they should consider or understand before they officially start their business or invest in China.
1. Analyze if you need to set-up a company in China or not?
2. Test China Market – Start a business in China without setting up a legal entity
3. Setting up a legal entity in China
4. Understand China Hiring Practice
5. Different Tax obligations for China WFOE
6. Trademark Registration in China
Analyze if you need to set-up a company in China or not?
For most of the foreign investors, when they are thinking about investment or doing business in China, they think of setting up a company in China to begin. Company Formation in China is quite complex and time consuming as it involves a lot of formal documentation that could take months to be completed by the foreign investors. Even after company establishment, foreign investors need to complete all the tax declaration on time to ensure the legal compliance. Therefore, establishing and maintaining the corporate operation in China is also not an easy task. Many foreign investors engage a local service provider who can assist them in handling the corporate formations along with dealing with the Tax & Accounting issues since they are not familiar with the local policy.
On the one hand, where establishing a company is not easy, closing a company, on the other hand involves even more complexities than opening. Many foreign investors might think of closing their company just after a few months of operation due to company losses, but closing down business in China is not so easy as simply stopping all the operations and abandoning the company.
Therefore, foreign investors should carefully consider the point if they really need a company setup in China to start their business or not when doing business in China. Before choosing a legal structure, one should think about the different alternatives that exists. For the initial stage, where you just want to test the China market for conducting market research, hiring employees through a local PEO/EOR agency in China without the need to establish a legal entity is the most viable and cost effective method to enter the market. If you are interested in selling your products directly in China, you can then consider of setting up a company in China.
Test China Market – Start a business in China without setting up a legal entity
As mentioned before, foreign investors can also choose to doing business in China without setting up a WFOE or RO in the initial stage of entry into the Chinese market. For such a scenario, companies can hire employees through PEO/EOR service to hire staff for conducting the market research, marketing, sales assistance, or client assistance to their oversea entity. This is a cost effective and a smart way for foreign investors for entry into the China market in the initial stage.
Through PEO/EOR agencies, employees are hired and managed on behalf of the company and everything from payroll setup, drafting contracts and legal matters are handled by these agencies so that foreign companies can access and test the market in a flexible and fully compliant manner.
While setting up legal entities in China may require a great deal of time and investment, labor dispatch and PEO solutions are the best alternatives and the most popular options for hiring local employees in China as it requires minimal cost and flexible hiring process.
After a couple of months of doing business in China under this model, foreign companies can then choose to set up a WFOE in China; or they can leave the Chinese market by terminating these employees through the HR agency if they feel the business cannot survive the market. Since both; hiring and termination is handled by the HR agency, it gets very convenient and flexible for foreign companies not only to enter but if required, to leave Chinese market as well.
Setting up a legal entity in China
If you decide to create a legal presence in China, you need be aware of the many legal structures available to get your business up and running in China. The five categories of entities in China are listed below.
- Representative Office (RO)
- Wholly owned Foreign Enterprise (WFOE)
- Contractual or Cooperative Joint Venture (CJV)
- Joint Venture (JV)
- Foreign Invested Partnership Enterprise (FIPE)
Understand more about Company Registration in China.
Process for Company Setup in China
The general actions and paperwork required to incorporate a legal corporation in China are listed below. Foreign investors should be aware that the documentation may differ from one location to the next, so it is highly recommended that they choose an experienced local service provider or law firm to manage the setup when doing business in China. Extra documentation must also be provided if a particular license is required in a specific business.
- Make an application for name approval and registration.
- Rent office space as needed.
- Online registration is available through MOFCOM.
- Apply to the local Administration of Industry and Commerce for a “5 in 1” business license (AIC).
- Carving chops for the new business.
- Creating bank accounts.
- Register with the appropriate tax authority.
- Additional registrations with municipal governments. Before establishing business in certain industries, certain licenses must be obtained.
- Create an account for the company’s social insurance and housing fund.
- Contracts must be issued, and personnel must be registered.
WFOE Documents Required
Registration Data: This includes, but is not limited to, proposed Chinese name list, registered capital, registered address, company scope, and shareholders.
Notarized documents for the investor’s business license.
Certified Notarization documentation for the investor’s business license were translated.
Legal representative passport. Finance manager passport. Supervisor passport. Liaison Person passport. Investor controller passport.
Understand China Hiring Practice
No matter you decided to set up a company in China or hire employees through HR agency when doing business in China, you should also understand some important hiring practices in China to ensure that your hiring in China is compliant with the local regulations.
Below mentioned are some of the important points that foreign employer should understand.
Sign Written Labor Contract
When it comes to hiring employees in China, the employment/labor contract is the first priority which should be in written and signed with each employee in a timely manner.
The employment contract must include the below mentioned information. In case of an expatriate employee, it is suggested that the contract should be bilingual (English and Chinese).
- The date of contract signing/time of contract.
- The registered name of the employer, registered address, details of its legal representative or supervisor and Signature.
- The name of the employee, permanent and temporary address, valid identity card details and Signature.
- The term/duration of the Employment contract.
- The job description, probation period and work location.
- The working hours, daily breaks, working days, annual holidays should be mentioned.
- The compensation and benefits of the employee.
- The social insurance information.
- Employer expectations with regards to the ‘quality’ of services.
- The non-disclosure of information or non-competition clause.
- The clauses which may lead to termination of employment or discontinuation of services.
- Information about relevant labor protections, favorable working environment and protection against occupational hazards.
Cost for hiring employee in China
It is critical to understand how much you must pay to hire an employee in China when doing business in China. The structure of your monthly employee hire cost, as shown below, should be very clear and unambiguous.
Read more about How to Calculate Employee Salary in China.
Mandatory benefits-Social Insurance and Housing Fund
Because of mandated benefits, the hiring cost of an employee in China may be 35-40% higher than the person’s gross compensation.
The Chinese Social Security System is made up of five mandatory insurance schemes (pension fund, medical insurance, industrial injury insurance, unemployment insurance, and maternity insurance) as well as a housing fund (only applicable to Chinese employees).
Learn more about China social security system, Complete Guide on China Social Security System.
In China, mandatory benefit contribution policies are very complicated with each province, cities having their own contribution policies and bases. As an HR company, especially the foreign ones, should be very clear and stay updated about the local policies where their company has the presence.
The central government enacted China’s social security law, but local governments are in charge of administration and detailed specifics. For example, the employee and employer contribution rates and bases differ depending on the local jurisdiction and are subject to annual modifications and reforms.
National Public holidays
Employees are entitled to the holidays listed in the chart below, and the employer is required to honor them. Every year, seven official public holidays are honored in China. The specific holiday periods would be altered annually.
Although the majority of these leaves are necessary, the employer always has the option to offer additional leaves or vacations in accordance with the company’s policy. However, the employer should be aware that once it is documented in the company’s policy via correct procedure, the indicated extended leaves or other benefits would become necessary.
The yearly leave is calculated based on the employee’s working period.
1-10 years cumulative working years: 5 days annual paid leave
Cumulative working years 10 days yearly paid leave for every ten years worked
15 days annual paid leave for every twenty years worked.
If an employment contract includes a length of no less than 3 months but less than 1 year, the probation period may not exceed 1 month.
If an employment contract includes a length of no less than one year but no more than three years, the probation period cannot be more than two months.
If an employment contract has a term of no less than three years or is non-fixed term, the probation period cannot be more than six months.
An employer may only impose one probation period on a single employee. A probation period shall not be specified in a project-based employment contract or a contract with a length of less than three months.
How can I hire expats working in China?
Expats can only lawfully work in China after acquiring a work permit and a residence permit.
According to the government’s new grading system based on talent points, the new work permit policy in China categorizes the work permit of every lawfully employed expatriate in China as type A, type B, or type C. This new grading system will rate several aspects of the candidate’s background, such as education, Chinese language ability, pay in China, duration of work experience in China, and so on.
Different Tax obligations for China WFOE
The Chinese tax system for foreign businesses is intricate and subject to quick change. To properly plan operations in the country and to adhere to legal requirements, understanding is essential for every company doing business in China. China has two different tax regimes that apply to businesses. Taxes on business profits and income, such as corporate income tax and withholding tax taxes on sales and turnover, including real estate taxes, consumption taxes, and stamp taxes
China’s VAT system has experienced significant change in recent years. There used to be a number of different rates for distinct regions and a separate Business Tax for various types of service income. A new VAT system with three distinct VAT rates—6, 11, and 17 percent—was deployed nationally starting in July 2017 as a result of their progressive simplification and integration.
Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax that is assessed in China based on a portion of the invoiced sale price for goods and services.
It matters a lot in China whether a business is registered as a small-scale or general VAT payer. The requirements for this are based on annual taxable sales levels, however a small business may be better off signing up as a general payer in many cases.
China Company Income Tax
All Chinese companies are subject to the China Business Tax, sometimes known as the Corporate Income Tax (CIT). It is paid at a 25% rate on business profits. CIT now applies to all companies equally.
CIT is computed on an accrual basis, which implies that revenue and expenses are recorded in the order in which they are earned/spent. It is calculated, paid, and reconciled annually as part of the year-end audit of a corporation. More tax is being paid or a rebate is being requested at this time.
WT is charged on payments of income to non-resident companies. For such payments, a tax must be “withheld” prior to remittance. Currently, there is a 10% withholding tax rate, but keep in mind that this is a general decrease from a higher rate of 20%, so it could change in the future.
Registering a trademark in China is a crucial legal step for multinational businesses when doing business in China because China recognizes trademarks registered in its own jurisdiction. In the absence of registering the company’s trademark in China, they may lose infringement accusations, regardless of how lawfully they have been selling things under the same brand in other countries. A trademark protects a corporation from counterfeiters and fraudulent suppliers.
Chinese trademark definition
A trademark is used to indicate a particular use for products or services, enabling customers to tell them apart from those made by other vendors in the market.
The following prerequisites must be satisfied in order to be qualified for trademark registration in China.
- The mark must be valid, distinct from other marks, and not depict the name or flag of any nation or other international organization.
- It should be different from the essence of the services and goods, and therefore cannot operate.
- It should be possible to register it in a searchable online database of all currently registered trademarks.
Procedures for registering a trademark in China
Below are the steps to finishing the registration procedure.
Filing the application with the World Intellectual Property Organization (WIPO) or the China Trademark Office (CTMO) (WIPO).
Because China’s international classification of commodities and services further separated the divisions, we chose the product and service subclasses. If they are not related, this enables multiple businesses to register the same trademark in each subclass.
The registration of a foreign company’s trademark in their native tongue in Chinese characters will not shield them from infringement in China.
China’s business climate is challenging. Before doing business in China in China, do as much research as you can, familiarize yourself with Chinese culture, language, and business customs, and get in touch with a reputable local service provider to confirm your operation compliance in China.
About JSC – China PEO & Employment Expert.
JSC is a professional service company that assists foreign-invested companies in doing businesses in China.
Our core services China PEO and employment solution enables foreign investors to hire employees in China without setting up any company which allow them to expand into China market in days, not months. Our in-country local experts are also experienced in assisting businesses to compliantly establish their own legal entity in China.
Please contact us if you require any other information on China PEO.